Support for Southern Cross merger

Communications Minister Stephen Conroy announced late last year the government would abolish the reach rule, which would affect a merger between Southern Cross Media and Nine Entertainment.
Photo: Tamara Voninski

by
Ben Holgate

Two of
Southern Cross Media
’s major institutional shareholders have thrown their support behind a potential $4 billion merger with Nine Entertainment Co.

Southern Cross Media confirmed on Monday it was “reviewing a number of strategic options" as it continued discussions with Nine Entertainment over a deal that could be struck if the federal government follows through with a promise to scrap “reach" rules that now prevent mergers between metropolitan and regional networks.

One option is to place Southern Cross’s regional TV stations and Nine’s metropolitan stations on the east coast of Australia, plus Nine’s Newcastle station, in a separate corporate entity listed on the stock exchange, said sources. This would leave Southern Cross with its regional and metropolitan radio assets, which includes the Today radio network. UBS is advising Nine and Macquarie Capital is advising Southern Cross.

“TV is the weak part of their [Southern Cross’] asset base. If you can strengthen the TV part, that is a sensible thing to do," said Simon Marais, managing director of fund manager Allan Gray, which with almost 11 per cent of shares is Southern Cross’s second-largest shareholder after Macquarie Group.

Mr Marais said some sort of merger between Southern Cross and Nine made sense from the former’s perspective because it had been hurt by its regional TV affiliation agreement with the Ten Network, which expires in June. Ten’s supply of low-ratings programs has caused Southern Cross’s advertising revenue to decline.

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However, Mr Marais said he could not form a view on any potential merger between the two media companies until more details emerged. “It would depend on the terms," he said.

David Paradice, whose Paradice Investment Management owns just under 5 per cent of Southern Cross, said he supported a separately listed TV vehicle in principle.

“If they put them in a merged vehicle, that’s not a bad thing," Mr Paradice said. “I don’t think it would be such a good thing if Southern Cross were to buy Nine. You probably would not want to get a lot more debt on board. But it all depends on what the numbers are."

Southern Cross said in a a statement to the ASX on Monday: “The board has not, at this stage, formed a view as to any preferred option." Chairman
Max Moore-Wilton
declined to comment when contacted by The Australian Financial Review. Southern Cross said it understood “there may be speculation regarding the strategic direction of the company" in the context of its decade-long agreement with Ten Network Holdings expiring in June.

The expiry of the agreement has provided a catalyst for the merger talks. However,
Ten Network Holdings
, which has an affiliation agreement with Southern Cross, wants to continue to negotiate for a renewal of the content sharing deal when it expires in June. Ten Network Acting Chief Executive Officer, Russel Howcroft, said: “Ten Network is continuing to discuss its affiliation agreements with Southern Cross Media in good faith and in accordance with its obligations.

“Any potential change to those agreements needs to be viewed in the content of the current media laws."

Southern Cross said in its statement that “under the current legislative framework, any merger between SCA [Southern Cross] and any of the metropolitan television stations is effectively prohibited."

A source close to Nine said its talks with Southern Cross were “exploratory" and “will take months". Nine’s own regional affiliation agreement with WIN Corp expired last June and the pair has operated on a rolling agreement since then.

Market sources said it was unlikely either Southern Cross or Nine would have the balance sheet to buy the other entirely.

“It’s got to be a scrip deal," said a media analyst, who did not wish to be named. “They’re both sitting on a lot of debt."

Nine earlier this year completed a $3 billion recapitalisation and now carries about $700 million in new debt. It intends to list on the stock exchange by mid next year.